October 2008
Law Practice Management - Two Critical Measurements for Your Practice
Many of my clients tell me that sometimes when they are working on a case they feel an internal conflict between billing the client for the actual hours necessary to do the job and billing a more reasonable number of hours. That tug happens most frequently with a new attorney or a more seasoned one who is doing something for the first time.
Some of my clients tell me they automatically reduce the number of hours billed and bill what seems reasonable to them. Others bill part of the hours to the client and the rest of their time to administrative costs. Still others go ahead and bill the client for the actual number of hours worked.
No matter what you do there are risks to each choice.
By reducing the numbers of hours you bill you are reducing your earnings. Some might work extra hours to make up the difference but there is still a cost to you. If you bill the time to administration, you at least are aware that you worked those hours but you are still reducing your earnings. Finally if you go ahead and bill the client, there is the possibility of losing the client, getting a complaint, or having a billing issue.
Is there a way to minimize the number of times you feel the tension?
If you work on similar cases week after week you will get proficient at the work. You reach a point where you know the billable hours are justifiable and you bill them accordingly.
Choosing to limit your practice area to one to three specialties means you get familiar with the procedures. It will be rare then that you have to bill your client or administration for your learning.
Recently I was asked to speak at a meeting of solo lawyers. Many of them were very recent law school graduates but one had been in practice about 2 years. This more seasoned attorney said that while she worked she wrote down how many hours she spent on a particular case, how many hours she billed to the case, and how many hours she wrote off.
Later she could compare the number of dollars she collected to the number of dollars she billed. She also knew the total number of hours she wrote off and number she actually billed so she knew what percent of her working hours she was doing her case work. She even went so far as to calculate how much she actually earned per hour!
What she had created on her own were two critical measurements for any lawyer. Realization - the dollars collected compared to the number of dollars billed and Utilization - number of hours billed compared to the number of hours worked. Each of these measures is a percentage so for example if you bill $1000 but collect only $800 you have an 80% realization. If you work 50 hours in a week and bill 25 you have 50% utilization.
Managing these numbers is important to the profitability of the practice. To be profitable a firm needs between an 80 to 90% utilization and a 95%+ realization. Working to get your numbers to these levels will improve the financial health of your firm.
Monitoring the financial numbers of your practice is critical to the success of your firm. These two critical measurements can indicate an approaching problem before it turns into a crisis. What numbers are you watching and how frequently do you check on them?
Take Action
- Start collecting the information necessary so that you can calculate realization and utilization.
- Make the calculations to see how you are doing.
- If you are lower than the range of 80% to 90% for utilization, look for the problems and then create some guidelines for your firm to improve the number.
- If you are lower than 95% realization, look for the reasons and then create a plan for your firm to get to that number.
Our government is working to resolve a real problem with cash flow. Is cash flow a problem for your practice? I help my clients to have a profitable and fulfilling practice by helping them to monitor their cash flow so it never becomes a problem. Need some help? Call me at 781-598-0388.